What is a Cost Segregation Study?
A cost segregation study allows real estate owners to break down the capitalized costs of their buildings and identify building costs that would normally be depreciated over a 27 ½- or 39-year period, and instead depreciate them over much shorter periods of time. Non-structural elements of buildings, for example, may be depreciated over five, seven, or fifteen years. It makes sense logically: your carpet isn’t going to last for forty years, why should it depreciate over that period of time?
Why Should You Consider Cost Segregation?
Cost segregation works upon the same principle as most other sound tax planning: by decreasing current income and thereby deferring taxes to a later tax period, you can gain financially due to the time value of money. Put as simply as possible, a tax deduction today is worth more than a tax deduction next year, and worth a great deal more than a tax deduction thirty years from now.
What Does Cost Segregation Mean for Me?
If you own substantial commercial real estate, it could mean hundreds of thousands—if not millions—of dollars in tax deferments. It means a substantial influx in available cash thanks to decreased tax burden: while deferred tax will have to be paid in later years, this essentially amounts to an interest-free loan against money that will need to be paid regardless. Additionally, the law allows property owners to capture depreciation retroactively, as far back as 1987, providing the opportunity for even more substantial tax benefits. Finally, a cost segregation study provides a clear set of documentation in the case of an audit.
